Last week EPA finalized the Renewable Fuel Standard (“RFS”) levels for 2013. Although EPA missed the statutory deadline of November 30, 2012, for setting levels for the 2013 RFS, EPA notes that the statute does not provide any penalty for missing the deadline, nor does it remove the general requirements of the RFS if the deadline is missed. In light of the significant delay, EPA has extended the deadline for obtaining sufficient credits for gallons of ethanol equivalent fuels (known by the term Renewable Identification Number, or RIN) from February 28 to June 30, 2014. EPA also intends to meet the statutory deadline of November 30, 2013 for the 2014 standards, and therefore will have released the 2014 standards well in advance of the 2013 compliance deadline. This will allow obligated parties to make informed decisions about their 2013 compliance strategies, such as whether to use banked RINs, or save certain RIN categories for 2014 compliance.
Relief for the Blend Wall?
The amount of ethanol that can be blended into gasoline generally has a pragmatic cap of 10% (i.e., E10 gasoline), because customers are reluctant to use higher blends as most vehicle engines currently in use are not designed and/or are not warrantied for higher percentages. This limit is referred to as the “blend wall.” Because of the use of carryover RIN credits and increased use of biodiesel, which reduces the volume of ethanol required to meet the mandate, EPA estimates that in 2013 the total volume of ethanol consumed in order to meet the requirements will not exceed 10% of the gasoline volume sold. In contrast, in 2014, EPA acknowledges that the carryover credits likely will not be sufficient to avoid the blend wall, as the statutory volume requirement increases significantly. EPA states that it will propose adjustments to the 2014 volume requirements, and that it believes it has the “authorities and tools needed to address these challenges.” However, EPA does not specify the measures it will take. In addition to EPA’s authority to reduce cellulosic and advanced biofuel volumes, and the resulting total renewable fuel volume, EPA has statutory authority to grant a waiver of the total renewable fuel requirements themselves, if EPA determines there will be severe economic hardship. EPA has denied prior petitions for waivers with language that sets a high bar for making the hardship determination. In light of that precedent, the increasing volumetric requirements of the statue and continuing decrease in gasoline demand, it is not clear how much relief EPA will be able to provide without overriding its own precedent.
Cellulosic and Advanced Biofuel Volume Impacts
Another aspect of EPA’s action was to set cellulosic and advanced biofuel compliance levels for 2013. EPA removed the cellulosic requirement from the 2012 calendar year in response to a decision by the D.C. Circuit finding that EPA had erred in setting the 2012 cellulosic requirement at a level meant to be technology-forcing, even though actual commercial cellulosic production in 2010 and 2011 had been zero gallons. For 2013 EPA undertook an expanded analysis, justifying a 6 million gallon cellulosic volume requirement based on production estimates from operating facilities, despite negligible cellulosic production in 2012. Commercial cellulosic ethanol production has commenced only this summer, but commercial producers believe there will be sufficient production by the end of 2013 to meet the cellulosic requirement.
The 6 million gallon requirement is dramatically reduced from the statutory requirement of one billion gallons. Cellulosic biofuels are a subset of “advanced biofuel” under the statute; advanced biofuels in turn are a subset of renewable fuels. Under the statue, EPA has discretion to lower the advanced biofuel and/or renewable fuel requirements by the same amount as the cellulosic reduction; however, EPA has determined that there will be sufficient alternative sources of advanced biofuels to make up the decrease in cellulosic biofuel in 2013. EPA notes in its discussion of 2014, however, that this will likely not continue to be the case next year, suggesting the agency will extend the cellulosic reduction to the other fuel category requirements.
The final 2013 standards, currently available on EPA’s website as a pre-publication manuscript, will be published in the Federal Register in the near future, which will start the clock for any judicial challenges or petitions for reconsideration. EPA notes that it will be conducting significant outreach surrounding the 2014 standards, and will request comment on its proposals for adjusting the volume requirements in its 2014 RFS Notice of Proposed Rulemaking, or NPRM. Given the statutory requirements for issuing waivers and volume reductions, and EPA’s past actions regarding waiver requests, EPA’s claim that it has sufficient authority to address the blend wall problem in 2014 will likely be tested by commenters.
Failure to solve the blend wall conundrum has the potential to pose significant liabilities for parties obligated to produce or acquire RINs (primarily refiners) and significant opportunities for those who generate RINs (primarily renewable fuel producers). Blend wall concerns drove corn ethanol spot market RIN prices to a peak $1.44 per gallon in July as compared to prices around $0.05 per gallon last year. Prices dropped nearly 40 percent after the announcement by EPA, but remain high compared to previous years. Assuming an E10 blend, RINs in 2013 have been adding $0.06 to $0.14 per gallon to the cost of producing gasoline.
Congress has been reviewing the requirements and consequences of the RFS, several bills have been introduced, and other legislative fixes may be introduced yet this year. But it is not certain that Congress will in fact make any changes that would affect the blend wall issue. Unless and until it does, the ball is in EPA’s court.